Scotiabank to Increase Small Loans in Mexico

Bank of Nova Scotia says it can
boost small loans in Mexico as much as 20 percent in a push for
business in Latin America, where lending margins are double the
Canadian average.

Canada’s third-largest bank expects to add to a C$3 billion
($3 billion) micro-loan portfolio with credit to consumers and
small businesses ranging from $300 to $3,000. The bank will
target clients in the 240 Mexico branches it acquired last year
from Citigroup Inc. (C)’s Banamex unit.

Half of Mexico’s population earns $1,000 or less a month
and Scotiabank could “easily” see a 15 to 20 percent
compounded annual growth rate in the segment, said Wendy Hannam,
executive vice president of Latin America.

“It’s a source of future retail customers for us, and a
profitable business,” Hannam said in a Jan. 14 interview at the
bank’s headquarters in Toronto. “We’re very comfortable with it
within the risk appetite framework we’ve set out.”

Scotiabank, which will hold investor days in Bogota and
Lima on Jan. 21 and 22, entered the consumer finance and micro-
lending markets in Peru about five years ago through the
acquisitions of Banco Wiese Sudameris and Banco Sudamericano.
Scotiabank has since expanded the plan to Chile and other
countries with a portfolio valued at about C$3 billion in the
fiscal year ended Oct. 31.

Loan Losses

The bank plans to increase consumer finance and
microlending in other countries where it already has operations,
including Peru, Chile, Colombia, Jamaica, Uruguay and the
Dominican Republic, Hannam said. The new segment will be based
in Lima.

In addition to having double the profitability of the
typical domestic loan, the business also carries double the loan
losses, Hannam said. Most loans are to be repaid in eight to 10
months, with a maximum term of two years.

“The same risk management that we put into all of our
businesses goes into this business as well,” said Hannam, who
has been with the bank since 1983 and was named to the Latin
America post last month. “We’ve also set within our risk
appetite framework thresholds for this business, so we don’t see
it growing past 10 to 15 percent of our total retail assets.”

The bank’s international loan book “has historically been
tilted towards business borrowers,” Sumit Malhotra, an analyst
at Macquarie Capital Markets in Toronto, said in an e-mail on
Jan. 16. “Given the favorable demographics and relatively
under-banked status of consumer finance borrowers in Scotia’s
target markets, focusing on this segment offers a higher-
yielding option from which to grow retail.” Malhotra has an
outperform rating on the stock.

International Bank

Scotiabank rose 11 percent in the 12 months through
yesterday, in line with the gain on the 10-member Standard &
Poor’s/TSX Banks Index (STBANKX) and ahead of the 3.6 percent advance in
the benchmark Toronto gauge. The shares climbed 0.8 percent to
C$57.86 in trading today on the Toronto Stock Exchange.

Scotiabank has about C$40 billion in retail loans at its
international segment, Hannam said. The unit had profit of
C$1.73 billion last fiscal year, an 18 percent increase from the
year earlier. It generated more than a quarter of the bank’s
record profit of C$6.47 billion last year.

Scotiabank will distribute loans in Mexico through its
Credito Familiar locations, through branches of businesses that
the lender has acquired and so-called ‘bank at work’ programs,
where employers allow the bank to offer services to employees.

Spanish Competitors

The bank has more than 8,000 employees for the consumer
finance and micro-financing segment in Latin America and the
Caribbean, representing almost 10 percent of its staff. “All of
these countries have growing populations and growing middle
classes,” Hannam said, referring to Latin America. “To have a
footprint where the GDP growth is averaging 5, 6 percent is
really great, and all of these countries building their domestic
economies.”

Under Chief Executive Officer Richard Waugh, the bank has
spent more than C$3 billion on foreign acquisitions in the last
five years. The pace of such deals will slow, with the bank
focusing on organic growth abroad, President Brian Porter said
in November.

One country that Hannam won’t be as focused on initially
for consumer banking is Brazil, where Scotiabank purchased
wholesale lender Dresdner Bank Brasil SA in 2010.

“Brazil, for us, is only a wholesale operation right
now,” said Hannam. “We don’t see big P&C acquisitions there.
There are extremely large banks there.”